New Revenue Standard Impacts Not-for-Profits

Many not-for-profit organizations may think the new revenue standard does not apply to them. The thought is that while a not-for-profit university or hospital might need to deal with the standard, it doesn’t really apply to charity and membership organizations. The thought process continues that all they get are contributions and member dues, and those aren’t really revenues are they? While contributions are outside of the scope of the new ASC 606 revenue recognition standard, membership dues are not.

There is an AICPA task force dealing with not-for-profit issues under the new revenue standard. You can find out more details on what they have been up to here, but I will try to cover a couple of the more important issues the task force dealt with in this blog.

First, the task force worked with the FASB staff to clarify that contributions are not in scope of ASC 606. But as I mentioned, membership dues and receipts for service are in scope, so questions were raised about potential impacts on the method for splitting transactions between contributions and “exchange components” (dues, charges for services, etc.). The short answer is that the methods for splitting transactions between contributions and other exchange components are still valid and do not need to change.

ASC 606 will potentially change the accounting for membership dues. Not-for-profits will now need to evaluate if membership dues provide members other deliverables, now known as performance obligations, than simply an annual membership. One example is if members get a reduced price on training courses which are available to non-members. If a course is free to members, but available to non-members at a price, that means part of the annual dues is really for the training course performance obligation. The kicker is the portion of the annual dues related to the training course cannot be recognized until the training course is delivered.

Even if the course is only offered at a reduced cost to members, there is still a potential split of annual dues for the “material right” to purchase the training course at a reduced cost. Once again, revenue associated with the material right can’t be recognized until the course is delivered. As long as all performance obligations are delivered within the period covered by the dues, then a not-for-profits total revenue in its annual financial statements won’t change, although individual line items might change. If, however, the obligation, a training course in this case, is not delivered until after the annual period used for dues recognition, then revenue recognition might be delayed until a subsequent period.

This topic is covered in much greater detail in paper 11-5 which is still available on the AICPA website for a little while. The moral of this story is that even if you don’t try to make a profit, you still have revenue, and the rules are changing under ASC 606.